Sure - if you want to raise from US investors you will probably need to be a DE-company (outside of exceptional circumstances). In any case I am happy to help, just enter your info into the form here: https://atriumllp.typeform.com/to/uTAYKJ
Thanks for the article, and putting on a workshop on fundraising. Regarding the workshop -- it seems like the application's only substantial question is "what business metrics do you have to support your beliefs?"
Do you believe there are quality businesses out there who can, should, and will be able to raise an A that don't have obvious metrics? It seems like that sort of question only applies to website- or app-centric companies that have obvious and easily-anagrammable metrics (ARPUs, CAC, churn, etc).
It's my feeling that some of the best, most disruptive companies won't have those metrics if they're operating in another space. (Though I have my bias; my company is one of those, at the moment.)
I fear that spreadsheet-driven investing tends to overfund incremental companies, but won't make the foundational investments required to build new platforms. But again, that's my bias.
Formal business plans (at least for internet or saas companies) are wildly over-rated and increasingly unnecessary.
They may provide more value in other industries (I have no/limited experience outside of internet/software).
Prototyping is so easy, quick, and inexpensive.
Why spend a week or two on a business plan when you can spend a week putting up a landing page, driving some ads at it, and then definitively get some data points on, "do people want what I'm about to do?"
"The snide answer is that
you are ready to raise an A
when you can convince a VC
to give you a term sheet.
The more nuanced answer is
when you have achieved
compelling enough
intermediate milestones
that convince VCs that cash
is your constraint to
scaling your business. In
other words, you have
something that works, and
all it takes is pouring
money on it to grow it
much, much bigger."
The rest is assuming that
VCs don't know how to read
or think and need some
exciting experience as in
some movie.
A big problem for the VCs is that
for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow. Why? Because the associated computing is now so cheap and, for a Web site with a lot of traffic, revenue from ad networks is so easy to get.
> Why? Because the associated computing is now so cheap and, for a Web site with a lot of traffic, revenue from ad networks is so easy to get.
Obviously this is only true if the company makes money from ad revenue. Most startups* don't. Even with an ad revenue model, there's always an opportunity cost to not having more capital. Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.
It's not the right decision for every company. But if you've already raised seed-round VC, it probably makes sense for yours.
I've posted a lot of long, detailed posts at HN. Here I was trying to be brief.
Yes, I remember the Paul Graham definition about a "startup" being designed to grow fast. He is welcome to his opinion, but, sorry, I don't accept his definition and believe that relatively few people do.
> Obviously this is only true if the company makes money from ad revenue.
Well, you quoted what I said in rebuttal: "for a Web site with a lot of traffic, revenue from ad networks is so easy to get." So, I was talking about a Web site.
And for more in rebuttal, my sentence before had:
"A big problem for the VCs is that for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow."
So, I qualified with "good" and
"information technology".
Uh, a "good" one is not to
start from nothing to compete
with iPhone!
Now, mostly the juicy "good information technology" startups
are ad supported Web sites, e.g., be another Google or Facebook.
> Even with an ad revenue model, there's always an opportunity cost to not having more capital.
Equity capital brings overhead "costs" beyond belief: You and your team own 100% of your company and, with the first equity check, become a Delaware C-corp with a BoD that now controls the company. With common term sheets, you and your team suddenly go from owning 100% to owning 0% with a vesting schedule to get back to, maybe, 35%. But due to the loss of control, the BoD can fire you and your team at any time for any reason or no reason and before much of your stock is vested. And, for the vested stock, it is likely illiquid but has tax due you can't afford. You just had your company taken from you for
next to nothing. And, for the BoD meetings, accounting reports, auditing, legal charges, etc., guess who pays for those, including the first class airline seats, limo service, 4 star hotel nights, high end meals, etc. for the BoD members for the meeting?
> Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.
A company that has the traction VCs really like will likely be generating enough cash that cash is not a major constraint on growth. Below let's see some relevant arithmetic:
An example is Plenty of Fish, long just one guy, owned 100% of the company, had two old Dell servers, ran ads just from Google, and had $10 million a year in revenue, nearly all pre-tax earnings. Eventually he deliberately hired some people and sold out for $500+ million. IIRC, he never took an equity check.
That's the startup case more like I had in mind, but I was being brief.
But we can have some more arithmetic:
IMHO, for the "good information tecnology" startups now, your model of the need for cash is outdated and past. Even if some cash could be helpful, the C-corp and BoD overhead, time, effort, cost in cash, loss of control, etc. are really not worth it, that is, are way too much to pay for the cash.
My central point was that for "good information technology" startups, the VCs are out of date, behind the times, and essentially out of business or at least well on the way.
So, for some arithmetic, to add detail, can get a motherboard for $100, an 8 core processor with 64 bit addressing and a 4.0 GHz clock for $125, max it out with 32 GB of DDR3 ECC main memory for about $320, get 2 TB hard disks for about $70 each, a high end power supply for about $100, a case for about $50, high end case fans for about $100, and lots of high end software for free.
I'll do the arithmetic for you -- $825. With cables, keyboard, screen, Windows 7 Professional 64 bit, more hard disks, etc., call it $1500 total.
But that's 8 cores at 4.0 GHz and
processor caches big enough that mostly don't need to worry mu...
To reiterate, seems like the business you're describing fits a pretty narrow profile: free bootstrapped site making money from ad revenue and growing by word of mouth and organic SEO (to minimize marketing spend). That is a phenomenal way to run a company, and if you can pull it off, you have my sincerest congratulations – however, you're likely not the target audience for the post above.
For software companies which don't follow your model (i.e. most of them) OR businesses which are aiming to trade growth for profit (a perfectly valid business strategy, see $AMZN), cost of hardware is almost _never_ the limiting factor compared to cost of labor. And to pay for labor at a loss, one may need to look for equity funding since banks won't extend debt to high-risk seed-stage businesses.
Your assertion as to the desirability of trading growth for profitability is entirely orthogonal, and the arithmetic about cost of server maintenance vs revenue - while informational - seems to miss the point entirely.
There will always be companies so great that VCs need to beg them to take money, but one only has to spend a day in Palo Alto coffeeshops to see that generally demand goes the other way.
> growing by word of mouth and organic SEO (to minimize marketing spend)
How else? I never saw an ad for Google, Facebook, Snap Chat, Drudge Report, Instagram, Twitter, or Plenty of Fish. More generally, I'm unsure just what significant bucks should be spent on marketing a startup such as I described. I can see trying to have some stories in some parts of the media and various other forms of publicity, but actual marketing, and as you also mentioned, sales, what's to do?
E.g., I was a B-school prof and across the hall from me was the guy who did, IIRC, the Pillsbury Dough Boy ads -- it was something that famous and novel he did. I've done high end applied math optimization for several cases of marketing. So, from that marketing, I see no connection with the startup I described.
For SEO, I doubt that Google did that! Nor Facebook, Snap Chat, Instagram, Twitter, Drudge Report, Plenty of Fish, etc.
Sure, if I type into the Google one line text box
KVR1333D3E9SK2/16G
I'll get a lot of hits of sellers and can believe that Google got SEO $ for that keyword. So, there may be hits from Amazon, Newegg, eBay, Tiger Direct, Memory4Less, and Kingston, and I can believe that Google got $ for those.
But sellers of
KVR1333D3E9SK2/16G
are not "good information technology" startups or candidates for Series A VC funding.
And for VC funding, there's another huge point: What the usual, even what is common on some Sand Hill Road coffee shop, etc. is essentially irrelevant. Instead, necessarily, especially if take the Paul Graham definition, the only things that are relevant are the really rare, literally once in a decade, exceptions. Here, too, the VCs are stuck-o because they have nearly none of the background to judge what will be so exceptional. The NSF, DARPA, and many departments at MIT, Princeton, and Stanford do at least on the technical parts. But IMHO, the technical parts should be so powerful, solve so well such an important problem, that they are about all that matters and isn't just trivial. The VCs don't agree yet. Tough for the VCs.
You raised the issue of labor: Well, I'd strongly recommend a founder to be a solo founder. This way he is forced to understand all of his business, and a good founder to be CEO needs to do that. Also he saves big bucks. He never has a "co-founder dispute" wastes essentially no time in meetings.
You raised the issue of hiring: Well, for a solo founder before any equity funding with $100+K a month in revenue, he can hire. Let's see: $120K a year is $10K a month plus some overhead, and can cover that a few times for the $100+K a month in revenue.
For hiring a rock star, full stack programmer, for me, no way. In my startup, I'm the rock star. And for the work of my startup, essentially no one in startup land, in a Silicon Valley coffee shop, computer science major, experienced developer, etc. has any hope of competing with me. Why? What's crucial for my startup, although the users will never know this, is some original applied math I derived, complete with theorems and proofs, from some advanced pure/applied math prerequisites. That's not programming, full stack programming, rock star programming, ugrad computer science, AI/ML, or chaired full prof of computer science work.
For the programming, sure, for my startup I did that, all of it. It was no big deal and doesn't make me a rock star or full stack programmer. Instead I just used the Windows .NET Framework, Visual Basic .NET (I don't like the C-like syntax of C#), ADO.NET for database, ASP.NET for the Web pages, TCP/IP sockets and object instance de/serialization for program to program communications, etc. Simple stuff. Visual Basic .NET? Fine with me. I'm thrilled with it. While I've programmed in a lot of languages, including C, I've never touched C++, C#, Python, Java, or JavaScript and won't unless I have a need to. I've...
I mean... sure. And the even better way to raise a series A is to not even need it at all because your company is a rocketship that's not only growing at 500% per year, it's ALSO cash flow positive and completely capable of just paying for itself.
But these things are impossible to arrange for many businesses.
Personally, I doubt it barring exceptional circumstance: previous achievement in another field, metrics that can't be ignored (tough to get via bootstrapping, though)...
I have heard from some seed stage investors that they will do priced seed rounds -- even some that claim to prefer it -- so there may be technical exceptions that really reinforce your point.
To be fair, the workshop's website also asks about previous fundraising. I've found this always comes up during fundraising discussions, too. Partially because the company's finances matter, but also because investors want social proof. I don't think this is as negative as it seems: early stage startups are black boxes, and any signal is helpful, I suppose -- and there's some sense that previous ability to 'sell' is indicative of future success. (I try to empathize with the investors on this one; they see a lot of pitches.)
My apologies if I misunderstood why were you asking that question. I'm not done the entire article but I didn't get the impression this was assuming that companies were going directly to a series A like Justin did with this company:
> The more nuanced answer is when you have achieved compelling enough intermediate milestones that convince VCs that cash is your constraint to scaling your business. In other words, you have something that works, and all it takes is pouring money on it to grow it much, much bigger.
> you can immediately call the other potential investors, and tell them that you have a term sheet from someone (don’t say who), and put pressure on them to give you a term sheet
sorry I don't quite understand this part. What would be the benefit of not saying who? (i.e. the first term sheet investor). Wouldn't saying it be more convincing and put more pressure on other investors?
If you have a term sheet from a great/good investor, you don't say who it is because all good investors talk and the investor you're trying to get a term sheet from will just call the investor who gave you a term sheet. Worse case, they talk each other out of the deal. Best case, investor B comes in ever-so-slightly above investor A's offer (vs. potentially coming in way above, in absence of knowing the price).
If you have a term sheet from a bad or unknown investor, you don't say who it is because all investors (great, good, bad, or ugly) will discount their offer significantly. There is a huge difference (even if it's bullshit) in getting a $10m A from Sequoia vs. a $10m A from a Dutch strategic investor who's making their second investment in three years.
25 comments
[ 3.0 ms ] story [ 65.2 ms ] threadI want to apply for Atrium Academy - but our company is based out of India - are we eligible for the academy?
Thanks for the article, and putting on a workshop on fundraising. Regarding the workshop -- it seems like the application's only substantial question is "what business metrics do you have to support your beliefs?"
Do you believe there are quality businesses out there who can, should, and will be able to raise an A that don't have obvious metrics? It seems like that sort of question only applies to website- or app-centric companies that have obvious and easily-anagrammable metrics (ARPUs, CAC, churn, etc).
It's my feeling that some of the best, most disruptive companies won't have those metrics if they're operating in another space. (Though I have my bias; my company is one of those, at the moment.)
I fear that spreadsheet-driven investing tends to overfund incremental companies, but won't make the foundational investments required to build new platforms. But again, that's my bias.
Curious for your thoughts -- thanks!
They may provide more value in other industries (I have no/limited experience outside of internet/software).
Prototyping is so easy, quick, and inexpensive.
Why spend a week or two on a business plan when you can spend a week putting up a landing page, driving some ads at it, and then definitively get some data points on, "do people want what I'm about to do?"
"When are you ready to raise a Series A?"
"The snide answer is that you are ready to raise an A when you can convince a VC to give you a term sheet. The more nuanced answer is when you have achieved compelling enough intermediate milestones that convince VCs that cash is your constraint to scaling your business. In other words, you have something that works, and all it takes is pouring money on it to grow it much, much bigger."
The rest is assuming that VCs don't know how to read or think and need some exciting experience as in some movie.
A big problem for the VCs is that for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow. Why? Because the associated computing is now so cheap and, for a Web site with a lot of traffic, revenue from ad networks is so easy to get.
Obviously this is only true if the company makes money from ad revenue. Most startups* don't. Even with an ad revenue model, there's always an opportunity cost to not having more capital. Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.
It's not the right decision for every company. But if you've already raised seed-round VC, it probably makes sense for yours.
* Following the definition in http://www.paulgraham.com/growth.html
Yes, I remember the Paul Graham definition about a "startup" being designed to grow fast. He is welcome to his opinion, but, sorry, I don't accept his definition and believe that relatively few people do.
> Obviously this is only true if the company makes money from ad revenue.
Well, you quoted what I said in rebuttal: "for a Web site with a lot of traffic, revenue from ad networks is so easy to get." So, I was talking about a Web site.
And for more in rebuttal, my sentence before had:
"A big problem for the VCs is that for a lot of the good information technology startups, by the time the startups have the revenue the VCs want, the startups will also have plenty of cash to grow."
So, I qualified with "good" and "information technology".
Uh, a "good" one is not to start from nothing to compete with iPhone!
Now, mostly the juicy "good information technology" startups are ad supported Web sites, e.g., be another Google or Facebook.
> Even with an ad revenue model, there's always an opportunity cost to not having more capital.
Equity capital brings overhead "costs" beyond belief: You and your team own 100% of your company and, with the first equity check, become a Delaware C-corp with a BoD that now controls the company. With common term sheets, you and your team suddenly go from owning 100% to owning 0% with a vesting schedule to get back to, maybe, 35%. But due to the loss of control, the BoD can fire you and your team at any time for any reason or no reason and before much of your stock is vested. And, for the vested stock, it is likely illiquid but has tax due you can't afford. You just had your company taken from you for next to nothing. And, for the BoD meetings, accounting reports, auditing, legal charges, etc., guess who pays for those, including the first class airline seats, limo service, 4 star hotel nights, high end meals, etc. for the BoD members for the meeting?
> Just because you may bring in revenue which you reinvest back into the business, doesn't mean you couldn't grow faster by having more to spend on hiring, marketing, sales, etc.
A company that has the traction VCs really like will likely be generating enough cash that cash is not a major constraint on growth. Below let's see some relevant arithmetic:
An example is Plenty of Fish, long just one guy, owned 100% of the company, had two old Dell servers, ran ads just from Google, and had $10 million a year in revenue, nearly all pre-tax earnings. Eventually he deliberately hired some people and sold out for $500+ million. IIRC, he never took an equity check.
That's the startup case more like I had in mind, but I was being brief.
But we can have some more arithmetic:
IMHO, for the "good information tecnology" startups now, your model of the need for cash is outdated and past. Even if some cash could be helpful, the C-corp and BoD overhead, time, effort, cost in cash, loss of control, etc. are really not worth it, that is, are way too much to pay for the cash.
My central point was that for "good information technology" startups, the VCs are out of date, behind the times, and essentially out of business or at least well on the way.
So, for some arithmetic, to add detail, can get a motherboard for $100, an 8 core processor with 64 bit addressing and a 4.0 GHz clock for $125, max it out with 32 GB of DDR3 ECC main memory for about $320, get 2 TB hard disks for about $70 each, a high end power supply for about $100, a case for about $50, high end case fans for about $100, and lots of high end software for free.
I'll do the arithmetic for you -- $825. With cables, keyboard, screen, Windows 7 Professional 64 bit, more hard disks, etc., call it $1500 total.
But that's 8 cores at 4.0 GHz and processor caches big enough that mostly don't need to worry mu...
For software companies which don't follow your model (i.e. most of them) OR businesses which are aiming to trade growth for profit (a perfectly valid business strategy, see $AMZN), cost of hardware is almost _never_ the limiting factor compared to cost of labor. And to pay for labor at a loss, one may need to look for equity funding since banks won't extend debt to high-risk seed-stage businesses.
Your assertion as to the desirability of trading growth for profitability is entirely orthogonal, and the arithmetic about cost of server maintenance vs revenue - while informational - seems to miss the point entirely.
There will always be companies so great that VCs need to beg them to take money, but one only has to spend a day in Palo Alto coffeeshops to see that generally demand goes the other way.
How else? I never saw an ad for Google, Facebook, Snap Chat, Drudge Report, Instagram, Twitter, or Plenty of Fish. More generally, I'm unsure just what significant bucks should be spent on marketing a startup such as I described. I can see trying to have some stories in some parts of the media and various other forms of publicity, but actual marketing, and as you also mentioned, sales, what's to do?
E.g., I was a B-school prof and across the hall from me was the guy who did, IIRC, the Pillsbury Dough Boy ads -- it was something that famous and novel he did. I've done high end applied math optimization for several cases of marketing. So, from that marketing, I see no connection with the startup I described.
For SEO, I doubt that Google did that! Nor Facebook, Snap Chat, Instagram, Twitter, Drudge Report, Plenty of Fish, etc.
Sure, if I type into the Google one line text box
KVR1333D3E9SK2/16G
I'll get a lot of hits of sellers and can believe that Google got SEO $ for that keyword. So, there may be hits from Amazon, Newegg, eBay, Tiger Direct, Memory4Less, and Kingston, and I can believe that Google got $ for those.
But sellers of
KVR1333D3E9SK2/16G
are not "good information technology" startups or candidates for Series A VC funding.
And for VC funding, there's another huge point: What the usual, even what is common on some Sand Hill Road coffee shop, etc. is essentially irrelevant. Instead, necessarily, especially if take the Paul Graham definition, the only things that are relevant are the really rare, literally once in a decade, exceptions. Here, too, the VCs are stuck-o because they have nearly none of the background to judge what will be so exceptional. The NSF, DARPA, and many departments at MIT, Princeton, and Stanford do at least on the technical parts. But IMHO, the technical parts should be so powerful, solve so well such an important problem, that they are about all that matters and isn't just trivial. The VCs don't agree yet. Tough for the VCs.
You raised the issue of labor: Well, I'd strongly recommend a founder to be a solo founder. This way he is forced to understand all of his business, and a good founder to be CEO needs to do that. Also he saves big bucks. He never has a "co-founder dispute" wastes essentially no time in meetings.
You raised the issue of hiring: Well, for a solo founder before any equity funding with $100+K a month in revenue, he can hire. Let's see: $120K a year is $10K a month plus some overhead, and can cover that a few times for the $100+K a month in revenue.
For hiring a rock star, full stack programmer, for me, no way. In my startup, I'm the rock star. And for the work of my startup, essentially no one in startup land, in a Silicon Valley coffee shop, computer science major, experienced developer, etc. has any hope of competing with me. Why? What's crucial for my startup, although the users will never know this, is some original applied math I derived, complete with theorems and proofs, from some advanced pure/applied math prerequisites. That's not programming, full stack programming, rock star programming, ugrad computer science, AI/ML, or chaired full prof of computer science work.
For the programming, sure, for my startup I did that, all of it. It was no big deal and doesn't make me a rock star or full stack programmer. Instead I just used the Windows .NET Framework, Visual Basic .NET (I don't like the C-like syntax of C#), ADO.NET for database, ASP.NET for the Web pages, TCP/IP sockets and object instance de/serialization for program to program communications, etc. Simple stuff. Visual Basic .NET? Fine with me. I'm thrilled with it. While I've programmed in a lot of languages, including C, I've never touched C++, C#, Python, Java, or JavaScript and won't unless I have a need to. I've...
But these things are impossible to arrange for many businesses.
I have heard from some seed stage investors that they will do priced seed rounds -- even some that claim to prefer it -- so there may be technical exceptions that really reinforce your point.
To be fair, the workshop's website also asks about previous fundraising. I've found this always comes up during fundraising discussions, too. Partially because the company's finances matter, but also because investors want social proof. I don't think this is as negative as it seems: early stage startups are black boxes, and any signal is helpful, I suppose -- and there's some sense that previous ability to 'sell' is indicative of future success. (I try to empathize with the investors on this one; they see a lot of pitches.)
> The more nuanced answer is when you have achieved compelling enough intermediate milestones that convince VCs that cash is your constraint to scaling your business. In other words, you have something that works, and all it takes is pouring money on it to grow it much, much bigger.
sorry I don't quite understand this part. What would be the benefit of not saying who? (i.e. the first term sheet investor). Wouldn't saying it be more convincing and put more pressure on other investors?
If you have a term sheet from a bad or unknown investor, you don't say who it is because all investors (great, good, bad, or ugly) will discount their offer significantly. There is a huge difference (even if it's bullshit) in getting a $10m A from Sequoia vs. a $10m A from a Dutch strategic investor who's making their second investment in three years.